Comments on: A Hypothetical Conversation Between a Stock Picker and an Indexer

By: Jack

Jack — Sat, 17 Jul 2010 02:25:36 +0000

Not at all. The shelf stockers and janitors may not know anything about the company, but neither are they the ones selling their stocks in the IPO. It is, by definition, the owners who are selling into the IPO, and they know more about the company and its prospects than anyone else does.

By: Courtney

Courtney — Sat, 17 Jul 2010 00:45:11 +0000

You seem to only equate IPOs with small companies that some dude started in his spare bedroom. Six of the ten largest (in terms of sales) privately owned US companies have over 50,000 employees. You think the shelf stockers at Meijer or the janitor at Price Waterhouse Cooper either started those respective companies or knows much about them? Or have any influence over the operations of the company?

By: Jack

Jack — Fri, 16 Jul 2010 21:14:52 +0000

Right. In an IPO, it is the PRIVATE owners who are selling. You know, the people who know the MOST about the company, because they started it!

Now, they are usually selling to raise capital for investment, but they may be selling to cash out before the crash.

By: Courtney

Courtney — Fri, 16 Jul 2010 12:16:47 +0000

Again, Jack, in the context of this article, the hypothesis is that when you buy a share there is a 90% chance that an institutional investor with far more knowledge than you is selling you the share that you’re buying. In an IPO, there is a 0% chance that is true. For the purposes of the *public market* that share is being created. It didn’t exist on the public market before the IPO.

By: Jack

Jack — Fri, 16 Jul 2010 02:40:58 +0000

I’m sorry, Courtney, but you are dead wrong here. IPO shares do not come out of thin air, but are sold by the current owners of the company. I have been through an IPO with a company that was once employee-owned. The employees were allowed to sell their shares into the IPO.

A “share” is just that — part of a company. The total number of shares adds up to 100% of the company, whether there are 100 shares or 100 million.

By: Courtney

Courtney — Thu, 15 Jul 2010 21:06:00 +0000

“What I meant was, from where did the shares you purchased come? They did not come out of thin air. Someone had to sell them to you.” My point, Jack, is that sometimes (especially with IPOs), shares ARE coming ‘out of thin air’ – that is, someone is not selling you a share that they currently own; it is being created. Which is contrary to the point that the dialogue is making, in that an institutional investor who is much wiser than you is selling the share that you’re buying.

By: JLP

JLP — Thu, 15 Jul 2010 18:19:13 +0000

Good point, Magnus.

By: Magnus

Magnus — Thu, 15 Jul 2010 18:15:39 +0000

One common conclusion is when Steve and Sherman agrees that only one part in the transaction can be right. One winner and one loser.

I totally disagree with this. If the two parts reached their decision to buy/sell with (very) different time horizons on their minds they could BOTH be right.

By: Jack

Jack — Thu, 15 Jul 2010 16:45:29 +0000

The company cannot “create new shares.” It must split the existing shares.

Example: I own my own company, and I have all 100 shares. If I decide to go IPO, and sell 900 shares and keep 100, I have in reality split those 100 shares 10 to 1.

The owners of a private company must sell some of their ownership, some of their “share” in the company, in an IPO.

By: Courtney

Courtney — Thu, 15 Jul 2010 01:55:05 +0000

Jack, yes and no – the company has the option to create new shares during the initial public offering (and often does). “When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order at the same time…The existing shareholders will see their shareholdings diluted as a proportion of the company’s shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt.” (Wikipedia)